As parents get older, concern for the financial future of their children becomes an increasingly pressing worry. These anxieties are exacerbated when a child has a history of financial mismanagement, addiction or mental health struggle.
There are many ways to financially support children throughout their lives. However, parents should exercise extreme caution, and understand the unique implications of each approach before deciding how best to do so. The following article will discuss three ways for parents to help financially distressed children.
- A gift
A cash lump sum is a gift from a parent that has been validly transferred, without the expectation of repayment, benefit or gain. In effect, it is given absolutely and unconditionally. In some circumstances, gifting to a child can be an effective means of transfer, particularly in circumstances such as estate planning or tax minimisation. This is best documented in a Gifting Deed (Deed of Gift) prepared by a lawyer.
One disadvantage is that if the child experiences financial difficulty (such as bankruptcy) the asset gifted to the insolvent child will vest with the trustee in bankruptcy and become available to creditors. Neither child nor parent will receive any further benefit from the asset.
- A secured loan agreement
A secured loan agreement is a contractual agreement where a sum of money is provided to the child by the parent, repayable on request. The parents will usually take security (such as a mortgage), which provides a mechanism for repayment should their child become financially distressed. Parents may have no intention of ever being repaid, but this method of transfer ensures that the asset is not beyond recall and will not pass to third party creditors in an insolvency scenario.
- Testamentary trust
A testamentary trust is a discretionary trust, outlined in a Will. Unlike a gift or a secured loan agreement, a testamentary trust only comes into effect upon the death of the testator, outlining that assets will be held on trust for the benefit of the beneficiaries (children). A trustee (trust manager) has discretion when making distributions to the beneficiaries. The key benefit of a testamentary trust is that the assets do not automatically vest with the bankruptcy trustee should a beneficiary become insolvent. This can protect the assets from creditors. To be effective, this must be prepared by an experienced solicitor.
The takeaway
The best avenue for parents will depend on their unique circumstances. It is always best to consult with a lawyer or accountant before loaning, gifting or declaring a trust for your children.
*This article should not be taken as legal advice or substituted for legal advice.